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A Qualifying Free Zone Person (QFZP) pays 0% corporate tax on its Qualifying Income and 9% on its other taxable income. A free zone licence alone does not give you that rate. You have to meet each condition in every tax period. Source: Federal Tax Authority, Corporate Tax law Article 3 and Article 18, checked .
The conditions
Under Article 18 of the corporate tax law (Federal Decree-Law No. 47), a QFZP must:
- Keep adequate substance in the UAE
- Earn Qualifying Income
- Not have elected to be taxed under Article 19
- Follow the arm's length rule (Article 34) and keep transfer pricing documents (Article 55). See transfer pricing.
- Meet any other conditions the Minister sets
Ministerial Decision No. 229 adds two more: non qualifying revenue must stay within the de minimis limit, and the company must have audited financial statements under Ministerial Decision No. 84. Source: Ministry of Finance, Ministerial Decision No. 229, checked .
What counts as qualifying income
Cabinet Decision No. 100 sets what is Qualifying Income. It includes:
- Income from transactions with another free zone person, except Excluded Activities
- Income from non free zone persons only for Qualifying Activities that are not Excluded Activities
- Income from Qualifying Intellectual Property
- Other income within the de minimis limit
The lists of Qualifying Activities and Excluded Activities are in Ministerial Decision No. 229. Read the decision, or ask an adviser, for your activity. We do not copy the lists here. Source: Ministry of Finance, Cabinet Decision No. 100, checked .
The de minimis limit
Non qualifying revenue must not exceed 5% of total revenue or AED 5,000,000, whichever is lower. Both tests run on the same revenue, and the lower figure applies. Once total revenue is large, AED 5,000,000 becomes the cap. Below that, the 5% share is the cap. Track this during the year. Source: Ministry of Finance, Ministerial Decision No. 229, checked .
Audited financial statements
A QFZP must prepare and maintain audited financial statements, whatever its revenue. This applies to tax periods starting on or after . See free zone approved auditors for how free zone audit rules work. Free zone authorities set their own audit rules for licensed companies, so check yours. Source: Ministry of Finance, Ministerial Decision No. 84, checked .
Losing status
If a QFZP fails any condition at any time in a tax period, it stops being a QFZP from the start of that period. Under Ministerial Decision No. 229, it also loses the status for the next 4 tax periods. One slip, such as passing the de minimis limit in a single year, can put the company on the normal rate for five periods. Source: Ministry of Finance, Ministerial Decision No. 229, checked .
Lost status also matters for relief. A QFZP cannot use small business relief, so a company that loses status may want to test whether it can use that instead.
Why a free zone company still registers
The registration deadline rules cover free zone persons. A company set up on or after has 3 months from incorporation. You register, then file a return that shows you meet the conditions. See corporate tax registration for steps and corporate tax return filing for deadlines. Source: Federal Tax Authority, Decision No. 3 on the registration timeline, checked .
Questions to settle with your adviser
- Does each income stream sit in Qualifying Activities, or in Excluded Activities?
- Do you have staff, premises and decision making in the UAE that support the substance condition?
- Are all dealings with related parties documented at arm's length?
- Who is the auditor, and when does fieldwork start?
- Have you ever elected to be taxed under Article 19?
Before you rely on 0%
Check your activity against the lists, track revenue by type, and appoint an auditor early. If you are unsure, speak to a firm that works with free zone companies. Use the form on this page to ask for quotes.
